* H1 cash flow 1.67 bln euros vs 203 mln year ago
* H1 net loss 114 mln euros vs 471 mln loss year ago
* New CEO reports progress on pricing, costs
* Shares up 6 percent
(Adds CEO and analyst comments, details, background)
By Laurence Frost and Gilles Guillaume
PARIS, July 30 PSA Peugeot Citroen
reported a surprise surge in first-half cash flow and the first
auto-division profit in three years, sending the French
carmaker's shares soaring as its turnaround plan began to show
Operating cash flow jumped to 1.67 billion euros ($2.23
billion) in January-June from 203 million a year earlier, as new
Chief Executive Carlos Tavares slashed vehicle inventories and
began stamping out supply-chain inefficiencies.
Peugeot shares rose as much as 8.5 percent after the company
narrowed its net loss to 114 million euros from 471 million and
said the core manufacturing business was back in the black.
"PSA certainly surprised us this morning," London-based ISI
Group analyst Erich Hauser said. "It looks like PSA is actually
performing well ahead of plan."
Peugeot sold stakes to China's Dongfeng and the
French state earlier this year as part of a 3 billion euro share
issue, after racking up losses of 7.3 billion in two years.
Tavares pledged soon afterwards to trim the model line-up by
almost half, cut capacity, raise pricing and pare wage and
component costs to lift the automotive operating margin to 2
percent in 2018 and 5 percent by 2023.
On Wednesday, the former Renault second-in-command gave an
account of his efforts to press for leaner manufacturing - which
frees up cash by reducing stocks of parts and vehicles.
"You look at those lines (of inventory) and ask people how
you manage production," Tavares told analysts in Paris.
"After the first step, where people tell you that you're
already optimized, bla bla bla, in fact there are many ideas,"
he said. "What we've seen is a very joyful implementation of new
ideas that delivered great results."
By 2016, Peugeot aims to cut 1 billion euros from stocks of
parts, materials and finished vehicles through improved
supply-chain management. The number of vehicles in inventory
fell to 406,200 by June 30, down 7 percent on the previous year.
Despite stiff emerging-market currency headwinds, the auto
division returned to a 7 million euros operating profit - its
first since 2011 - from a 538 million loss.
Overall operating income swung to a 477 million euro profit,
for a 1.7 percent group operating margin, from a year-earlier
loss of 100 million.
Sales financing arm Banque PSA Finance reported a 7 percent
operating income decline to 172 million euros, while parts maker
Faurecia, majority owned by Peugeot, raised its
contribution to 311 million euros from 55 million.
Paris-based Peugeot's stock was up 6.2 percent at 11.255
euros as of 1010 GMT, the strongest performer on the STOXX
Europe 600 autos & parts index.
Some 550 million euros of the cash-flow gain, which excludes
restructuring, stemmed from working capital reductions that will
reverse in the second half, Peugeot cautioned.
But the company also reported pricing progress as it seeks
to narrow Peugeot's gap with Volkswagen and deliver
similar improvements for the Citroen and upscale DS brands.
New models including a DS sport utility vehicle and Citroen
C4 Cactus will offer further help, it said.
While the group's overall European market share was broadly
stable at 12.1 percent, Peugeot said it had increased its slice
of the lucrative consumer market by a percentage point and cut
down on loss-making sales to car rental companies.
"The mix stands out, thanks to PSA's focus on profitable
channels," said Exane BNP Paribas analyst Stuart Pearson. "With
a cleaned up balance sheet and lowered capacity, PSA has not had
to chase volume with low pricing as in the past."
Peugeot reiterated its medium-term recovery goals but
refrained from giving guidance for full-year 2014, warning that
serious risks remain in its path.
Group revenue fell 0.4 percent to 27.62 billion euros in the
first half as emerging-market currencies continued their slide
against the euro, putting a 251 million dent in earnings.
High overseas plant costs and weak supplier networks have
left Peugeot particularly exposed to the currency swings.
First-half sales volumes slumped 27 percent in Latin America
and 26 percent in Russia, far outpacing each market's decline.
In Europe, Peugeot said, the recovery in vehicle demand
remains fragile and is especially weak in France, the group's
second-biggest market after China. European car registrations
increased in June for a tenth straight month but were boosted by
"We remain very cautious about surfing on this European
growth," CEO Tavares said. "We need to stay lucid and recognize
that we are only at the beginning of our turnaround."
(1 US dollar = 0.7465 euro)
(Editing by Mark John, James Regan and Mark Potter)